INSTITUTIONS AND DEVELOPMENT By Mary M. Shirley

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1. THE CHALLENGE OF DEVELOPMENT

Developed countries are the exception, not the rule. Billions of dollars of aid and countless hours of advice notwithstanding, most countries have not been able to foster sustained growth and social progress. Increasingly research has shown that weak, Cross-country

missing or perverse institutions are the roots of underdevelopment.

regressions persistently demonstrate large and statistically significant correlations between institutional variables and growth, and in horse races between variables, an index of institutional quality “trumps” geography or trade as an explanation for growth (Rodrik, et al. 2002). To meet the challenge of development countries need two distinct and not necessarily complementary sets of institutions: (i) those that foster exchange by lowering transaction costs and encouraging trust, and (ii) those that influence the state to protect private property rather than expropriate it. 1 The first set of institutions includes contracts and contract enforcement mechanisms, commercial norms and rules, and habits and beliefs favoring shared values and the accumulation of human capital. Among the second set of institutions are constitutions, electoral rules, laws governing speech and education, and legal and civic norms. Today’s underdeveloped countries must acquire these

institutions under particularly difficult conditions -- in a global market competing with already developed countries (North 2002). Although there may be some advantages to

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I use the term development to mean countries which have achieved a level of per capita income that puts them in the World Bank’s high income category (above $9,266 in 2000), as well as high scores on selected social indicators (life expectancy at birth of over 70 years, infant mortality rate of less than 10